My recent post on a potential Congressional effort to obtain and disclose President Trump’s tax returns generated a wave of comments and questions. Setting aside a couple political rants, readers raised a number of questions which are worthy of comment. So, let’s dive into the e-mail bag.
What could we learn from President Trump’s tax returns?
Of course, we don’t know, but here are some educated guesses.
- Like the rest of us, he is required to file annual tax returns on Form 1040. Unlike the rest of us, his tax return reflects income and expenses earned through a complex network of business ventures and investments. As a result, his return undoubtedly includes many other forms, schedules, and explanatory statements providing information about these his various businesses. Each business or investment is likely organized through a separate entity such as a partnership, corporation, or trust. Each would file its own returns and would provide the President with an annual statement (e.g., Schedule K-1) reporting of his share of the entity’s income and tax attributes. While some information about these entities would likely be provided on the returns, although most of the facts about these entities would probably not be disclosed.
- All tax returns compute annual gross income, taxable income, and tax liability figures. Review of the President’s returns for a series of years would, therefore, provide readers with information regarding whether (or not) he is as wealthy and successful as his publicists would have us believe. A rough computation of his effective tax rate could be made and Americans who pay tax rates of 28% or more could compare the President’s rate to their own. Should a reader question a low tax rate for the President, the returns might provide some hints about the transactions, deductions, and tax credits which produce the disparity, although the details would not be disclosed.
- Tax returns focus upon computation of annual income; they do not compute the taxpayer’s net worth. The President’s returns would likely identify the entities owned by the President, but would contain only limited information regarding those holdings. For example, if he owned an interest in a real estate investment partnership called Volga Vistas Vacation Villas, the return would disclose the bottom-line income he received from that investment. It would not disclose if the majority owner in the venture was Vladimir Putin or if a Russian oligarch had provided loans to the partnership.
Does Special Counsel Robert Mueller have copies of the tax returns?
He is not saying, but the answer is almost surely “yes”.
IRS Criminal Investigation Division Special Agents associated with the Mueller investigation have largely unfettered access to tax returns in connection with their official duties. Separately, the Special Counsel can obtain the returns from the IRS upon request and with the approval of the Deputy Attorney General and the judge supervising the grand jury hearing testimony under Section 6103(i). In addition, he could have obtained copies of the returns pursuant to subpoenas or search warrants served on witnesses who had copies of the returns.
Aren’t my tax returns private and protected from public disclosure?
The general principle is that almost any document (including tax returns) can be subject to discovery through the judicial system. However, a collection of rules, procedures, and statutes often apply to protect our tax returns and private financial information from random dissemination. The question, therefore, is whether any of these protections would protect the President’s returns from disclosure.
In general, courts will protect private financial information from disclosure unless the party requesting the information has a good reason for requesting the information. In federal court litigation, a party seeking production of tax returns would be required to demonstrate that the returns are “relevant to any party’s claim or defense” and the request was not made for purposes of “annoyance, embarrassment, oppression, [harassment,] or undue burden.”[1] This blogger believes that a congressional investigation into the President’s tax returns as part of an official inquiry into potential financial conflicts of interest would most likely satisfy this standard.
With respect to tax returns, Section 6103 of the Internal Revenue Code provides the broadest statutory protection of tax returns. The statutory definition of tax returns or return information contained in Section 6103, however, limits the protection to documents which are “filed,” “furnished” or “collected” by the IRS. It does not protect identical copies of the same documents[2] held by the President, his accountants, or his lawyers, which can be obtained and disclosed through discovery. Regardless, Section 6103(f) specifically allows Congress to obtain the President’s (or anyone else’s) returns filed with the IRS, so the House Ways And Means Committee will surely request and obtain the President’s returns soon after the Democrats take control of the House in January.
Does the law protect my communications with my accountants?
The law has always recognized broad privileges for attorney-client and doctor-patient communications, but has not recognized a comparable privilege for communications between an accountant and a client. Nearly forty years ago, the Supreme Court ruled that there is no general “accountant-client privilege”[3] under common law or federal law. To the extent that protections of accountant-client communications have developed, thy have been the result of a patchwork of statutory provisions.
In addition to the Section 6103 protections, Section 7525 recognizes limited protection for advice given by accountants to assist their clients in planning future transactions. This relatively new statute focuses upon advice provided by accountants, not the underlying financial data held by the accountant. It does not apply to planning involving “tax shelters” and it does not apply to communications relating to a document which will ultimately be filed with a government agency (e.g., the IRS or the SEC)—entities outside any protected relationship between a professional and a client.
Lastly, Section 7216 generally bars accountants from disclosing information they obtained from their clients for purposes of preparing returns for other purposes. The focus of that statute is situations where the accountant uses the client’s financial information for the accountant’s benefit (e.g., selling client data to an investment or insurance broker). Situations where an unrelated litigant seeks a return from the accountant are closer cases, although the implementing regulations specifically provide that Section 7216 does not prevent an accountant from disclosing tax returns in response to a Congressional subpoena.
Why is all of this so complicated?
- A cynic might observe that lawyers always make things unduly complicated. More seriously, the complexity reflects the omnipresent conflict between our desire for information and our desire for privacy. Particularly when conflict arises, we always want to learn as much as possible about our adversaries. Conversely, we want to to privately consult with experts without rendering our secrets known to all. The conflict cannot be resolved easily and it is not surprising that the resulting body of law has almost endless nooks and crannies.
- The treatment of tax returns reflects this same tension. Historically, there was a time when filed tax returns were not protected and the information from individual returns was occasionally published in the newspapers. That has changed and the Nixon Administration’s effort to employ the IRS to persecute its “enemies” increased public sensitivity to misuse of financial information in tax returns and resulted in enactment of large portions of Section 6103. Not surprisingly, the statutory language enacted by Congress is designed to prevent abuses by the Executive and the IRS; it places far fewer restrictions upon tax return disclosure through Congress and the Judiciary. Indeed, the statute has been amended often over the years to allow disclosure of tax information for a variety of purposes including collection of child support obligations and investigating terrorism. One thing for sure, the treatment of information relating to tax liabilities continues to be a topic of regular discussion and the law will continue to develop.
[1] Federal Rule of Civil Procedure 26(b) and (c).
[2] Stokwitz v. United States, 831 F.2d 893 (9th Cir.1987), cert. denied, 485 U.S. 1033 (1988).
[3] Couch v. United States, 409 U.S. 322 (1973).